Got Retirement Money? Then You've Got Money to Buy Your Own Franchise

by John P. Hayes Ph.D.

If you've got a retirement fund, and even if you've been told you can't use the money to invest in a business, you're just four steps away from funding your own franchise acquisition.

Across the USA, entrepreneurs are turning their 401(k)s and other tax-deferred accounts into capital to invest in a franchise business. They're being helped by a cottage industry pioneered nearly 20 years to move retirement funds into capital that can be used to launch a business.

Oddly enough, an unpublicized tax law allows individuals to invest their retirement funds in a business without penalties, but there are four steps to the process, which must be closely followed to avoid objection by the IRS.

The steps are:

1. Set up a corporation.
2. The corporation establishes a retirement fund.
3. Roll over prior retirement plan or IRA into the new retirement plan.
4. The corporation directs that the funds be invested in your own company (franchise) stock.

The key here is that you are investing your retirement money and not withdrawing it. The latter would trigger penalties.

Several companies, including some that cater to franchise businesses, now exist to help would-be entrepreneurs take advantage of this program. Some that help prospective franchisees can be found through the International Franchise Association supplier directory.

Generally, these firms do all of the work for their clients. They establish the client's corporate bylaws, pay the filing fees, and issue appropriate stock certificates. In exchange for their work, companies charge from $4,500 to $7,500 for their services. The fee is "tax deductible," points out Leonard Fischer, who pioneered the industry and is now the CEO of BeneTrends outside of Philadelphia, Pa.

A Dec. 22, 2008 BusinessWeek article quoted Alice Bredin, a small-business consultant with American Express, who said it "is a really bad idea" to utilize retirement funds to launch a business. Fischer disagreed and said, "Obviously American Express wants you to keep your money in the stock market, but it's my opinion that you're better off setting up a corporation and investing in your own business. That's more sensible." Providing, of course, that you do your homework before investing in a franchise.

The IRS supposedly isn't thrilled about this service. But those who help entrepreneurs get into their own business say they are basically doing what the Obama administration expects. That is, they are helping to rebuild the economy, creating jobs, investing in businesses, and creating retirement plans.

If you've been shopping for a franchise, your plans may have been delayed for lack of funding. Small-business loans from traditional lenders had fallen 30 percent by the time of the BusinessWeek article, and probably more by now. If your only capital is in your retirement fund, and you want to start your own business and build the American Dream, this may be your only opportunity for success.

But don't get carried away! Investigate before you invest. Franchising is not for everyone . . . do your homework, choose carefully, and then take advantage of a retirement conversion plan.

John P. Hayes, Ph.D., author and speaker, has written the Franchise Pre-Investment Checklist to help you thoroughly research franchise opportunities. A 30-year franchise veteran who has owned franchises and was the CEO of a major franchise company, John is perfectly suited to help those who want to buy or start a franchise. He offers a variety of free reports, newsletters, teleconferences and seminars at www.howtobuyafranchise.com